Monday, March 8, 2010

The Credit Suisse report on 27 Great Brands of Tomorrow (11mb pdf!) starts off with a strong argument for the power of brand investing:

An underappreciated investment thesis. There are few true competitive advantages in modern industry: scale, proprietary technology, monopolies, and network externalities come to mind. We believe brand is an equally powerful and even more sustainable advantage, but one often ignored by financial markets owing to its intangible nature. Our research indicates that companies focused on brand building consistently generate outsized long-term growth, profitability, and returns. An equal-weighted stock index of companies that spend at least 2% of sales on marketing outperformed the S&P 500 by more than 400 basis points annually since 1997; the top quintile of these companies outperformed the market by an amazing 17% per year.

Now that's what I'm talking about! Credit Suisse admits that its use of marketing spend as a proxy to identify brand-oriented companies is "overly simplistic." Pretty amazing that even this crude measure works as well as it does.

Credit Suisse's report picks its 27 elite brands of tomorrow based on a deeper analysis of their potential. Most of the picks are brands that are "transforming," making the leap from niche/emerging players into powerful mainstream brands. Brands like Trader Joe's and Hyundai. These are brands that offer investors attractive returns, some risk but not as much as early-stage brands that may never make it over the hump once the initial rush of growth and enthusiasm is over. Only two early stage brands make the list: Facebook and Comac, a Chinese aircraft start-up.

The 27 brands distinguish themselves in one or more of what Credit Suisse believes to be three core sources of sustainable brand value creation. These are: aspiration, innovation and scale, each one on its own capable of creating a great brand but even stronger in combination. The strongest brands of all manage to combine all three--McDonald's, Apple, Disney, for example.

A second filter that Credit Suisse uses to identify high potential brands is how they fare against a list of "must haves" vs. "can't haves." Must haves include: authenticity, quality, brand-centric corporate culture. Can't haves include: brand over-extension, short-sightedness and alienation of core market. This list points to the need to make sure that business growth is achieved by leveraging brand strength rather than destroying it.

Overall, Credit Suisse is bullish on the outlook for brand investing. It thinks that brand investing works especially well coming out of a recession as consumers are less inclined to make purchase decisions based purely on price. It also believes that there are many brands from developing markets that are poised to breakout internationally in the next few years. The top 27 brands has many of these brands including: Taj Hotels and Mahindra from India, Li Ning from China and BIM, the Turkish discount food retailer.

21 comments:

Wow. This is HUGE. While not something the Fortune 100 don't know, it has a lot more weight coming from a large investment bank such as CS. Makes you want to invest in these companies right away. Has anything like this ever been done by another investment bank? Can't wait to read it.

Only one company in any given market can be the cheapest, the rest need to differentiate themselves some other way. Brand is one of the cheapest and most effective ways to do it but many entrepreneurs are very nervous about attempting. This isn't surprising because the branding industry talks a lot of nonsense about the process. It's very hard to figure it out and so it feels like gambling or voodoo rather than a rational business decision. Still, it's very helpful to see some evidence for the value of doing it.

There is always someone who can produce more of something and do it cheaper and get it to the market quicker & sell it cheaper than you can. The only thing that cannot be duplicated is your relationship with your customer.

Deliver economic, experiential and emotional value to existing customers (and not only new ones) and on their terms and you will build a profitable brand.

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